economic growth (idea)

As a slightly fuller definition, economic growth is the change in GDP. This is a bit different from per capita GDP, though per capita GDP is what many people are most interested in, as it is a measurement of living standards within an economy. The reason we talk about the change in potential GDP, as opposed to its growth, is that economic growth can be negative in some instances.

Traditional theories of economic growth tend to emphasise the role of changes in factor supplies. Neo-Classicaleconomists have provided most of what we recognise in modern growth theory. They believe that the ultimate determinant of economic growth is population growth, which is exogenous (in that government policies are to all intents and purposes unable to affect it). Neo-Classical theory states that increases in a single factor input will increase economic growth but with diminishing returns (that is, by an increasingly small amount) because after a while there is, for instance, only so much that extra labourers can add to the economy if there are only twenty factories. If, on the other hand, factors increase together, then economic growth will be constant.

In relation to per capita GDP, Neo-Classical theory states that an increase in labour will produce diminishing per capita GDP, because more labourers are adding relatively less and thus the wages paid to all will go down. If, on the other hand, physical capital increases above labour then there is no reason why per capita GDP should increase. If all factors increase at a constant rate, then per capita GDP will increase at a constant rate. Neo-Classical theory is quite depressing, because it implies that it is difficult for living standards to decrease and, in relation to general economic growth it implies that in the long run economic growth will slow down and may even halt if factor inputs increase unevenly. Because economic growth is largely the result of exogenous factors on this theory, it also means there's very little we can do about it. Bugger.

Governments generally believe that they can affect economic growth. Policies which aim at factor input increases have largely been ineffective, for the reasons given by the Neo-Classical economists. However, government can give incentives to firms to invest in research and development (R & D), by cutting taxes on these areas, or by giving grants. Thus, with the input of technology, there is room for optimism in the theory of economic growth. However, this is still a very uncertain field, with people unsure of the relative effectiveness of any single factor, such as education or R & D incentives.

It is also worth saying that some people see economic growth as undesirable, because as economies grow, they use more and more, often unrenewable resources, thus draining our planet. They sometimes also emphasise the need to concentrate on other goals, such as equitable redistribution (though those in favour of economic growth argue that with a larger economy it is easier to help the less well-off, because they can redistribute without the richer people losing any money). One of the key problems with economic growth is that it often lead to increased pollution. However, one of the inputs of technology is relatively to reduce pollution, which hopefully will be a continuing trend in the growth of our economies.